Do you know how to hire a banker?
Whether it's for an M&A or an infusion of venture capital, your banking choice requires care
- By David Hubler
- Aug 29, 2011
Ask any investment banker how federal contractors should go about developing a successful working relationship with them and their answer usually is “do your homework and do it early.”
“There are a lot of good [banks] in town," said Jean Stack, managing director of the Aerospace, Defense and
Government Group at Houlihan Lokey, a large national investment bank.
" I think it’s important that folks do their homework and make their selection very carefully." If you're planning to sell your company, she added, "you certainly want to make the right decision the first time because you only want to be in the market one time. You never want to go through this again.”
“There are a lot of benefits to engaging the right professionals early on in the process from a tax efficiency process and definitely from an estate planning process" perspective, especially in this uncertain economic environment, said Mark Dorney, senior vice president and wealth market leader at TD Bank.
Doing your homework early and being selective are important because the relatively large number of merger and acquisition opportunities in the federal contracting arena has spawned new entrants into the investment banking community, said Bob Kipps, managing director of KippsDeSanto & Co., an investment banking firm for growing, midsize companies.
Contractors should separate the experienced bankers from what Kipps called “the cheap knockoffs that have come into the marketplace in the last few years.”
It’s important for contractors to know how well investment bankers understand what Kipps called the three levels of the marketplace: capital financing, the defense and intelligence community, and the client company’s products and clients.
“Probably the most important thing is making sure that the banker has a thorough understanding of the company’s attributes or characteristics, both the positive ones and the challenges,” said Greg Van Beuren, managing director and partner at Blue Stone Capital Partners, a boutique investment banking group that advises middle-market companies.
“And if there are any challenges — which there always are — [there needs to be an] understanding of how the banker will navigate those challenges,” Van Beuren added.
Owners have different goals and strategies for their company and they should look for an investment bank that will take those concerns seriously, said Louise Wager, vice president and senior lending officer at TD Bank’s Government Contractor Lending unit. “You want an M&A banker who is aware of them and not just [trying to] sell you to the first company that comes along for the highest price."
“Contractors must take the time to get to know the people in the investment firm because they’re going to spend hundreds of hours with them,” said Stack, who also is a columnist for Washington Technology. “It’s the whole transaction team that is important. So you also need that A-plus legal team as well as an A-plus financial team.”
Stack said sellers should interview multiple bankers to get a sense of their experience and what they know about the valuation of their business. They should also ask who they would recommend as potential buyers or investors.
Choosing the right investment bank must include more than assessing the senior adviser, Kipps said. “It’s a team effort from the investment bank side, so the client should be looking at the full team, and all those people should be A-players, not just the senior person.”
To distinguish between what he called “B- and C-players” from “A-players,” Kipps said, company owners should seek a banking firm that is more than a broker, one that is a thoughtful strategic adviser and confidant.
Ideally the team should have worked together awhile, Kipps said. “That provides smoother, more consistent advice than having four people on a team that never really had experience working together.”
Van Beuren agreed. An investment bank’s reputation is important, he said, but not as important as the individuals who will execute the company’s transactions. Owners need to know the entire banking team and their individual strengths, and they must be comfortable with all of them.
“This is not an individual sport,” Van Beuren added. “We put at least four bankers on every transaction. And every banker plays an important role in the overall process.”
If an owner is seeking to sell, he or she should look for investment banks that work primarily on the selling side of the deal, Kipps said. “It’s very important that the seller work with an investment bank that is mostly, or exclusively, working with sellers versus a broader investment bank that works both sides of deals.”
The two biggest causes of bad deals are an investment bank’s loss of credibility with the buying community and an attempt to sell at the wrong time, he said.
Kipps advises examining the investment bank’s recent experiences with similar companies and questioning whether that bank can reach the right investors or buyers for the company.
It’s also important for the business owner to be comfortable enough with the banker to share proprietary information so that the bank then can perform enough due diligence to explain how it will position the company in the marketplace, Van Beuren said.
If the owner is seeking an investment bank to orchestrate the sale of the company, “it’s important for both parties to be on the same page in terms of the expectation of [company] value,” he said.
A clear sign that the banker has the seller’s best interests at heart comes when the banker agrees with the client’s broader objectives and advises postponing the sale if he believes the time is not right for the best possible outcome, Kipps said.
Also, with so many companies for sale now, the prospective seller must make sure the banking team has high-level relationships with potential buyers that it can put the seller’s story, or “book,” on the top of the pile it is looking at, Van Beuren said.
Sellers also should carefully check bank references by going beyond the “tombstones” the bank provides. “Maybe they [should] pick a different deal than the banker did and ask for some [other] references,” Stack said.
Her list of questions included: How much time did the senior people spend on the deal? Were they there for you? How much of the work did you need to do on your own? How often did your banker take the lead in things?
Stack also noted that investment bank fees can vary widely, so it’s appropriate to remember the adage "You get what you pay for."
“A good banker is going to more than make up for their fees in terms of the results they deliver," she said.
Stack suggested that small-business owners should not be wary of considering large investment banks. For one, they often can offer a broader range potential buyers and private equity groups than a boutique can. And they often will have contacts abroad that are seeking U.S. companies to buy.
But large investment banks may or may not give the smaller contractors the time and attention they need, Heine said. “So my piece of advice for a company that’s looking for an investment banker is talk to all of them.”
Create your own criteria of what’s important to you, Stack said, because like commercial banks, investment banks all have different personalities. “It’s not the size of the business that is important to us," she said. "It’s the attributes of the company that are important to us."